February 2nd 2013

S P E C I A L R E P O R T

T H E N O R D I C C O U N T R I E S

Northernlights

Nordics.indd 1 15/01/2013 15:13

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THIRTY YEARS AGO Margaret Thatcher turned Britain into the world’sleading centre of �thinking the unthinkable�. Today that distinction haspassed to Sweden. The streets of Stockholm are awash with the blood ofsacred cows. The think­tanks are brimful of new ideas. The erstwhilechampion of the �third way� is now pursuing a far more interestingbrand of politics.

Sweden has reduced public spending as a proportion of GDP from67% in 1993 to 49% today. It could soon have a smaller state than Britain. Ithas also cut the top marginal tax rate by 27 percentage points since 1983, to57%, and scrapped a mare’s nest of taxes on property, gifts, wealth and in­heritance. This year it is cutting the corporate­tax rate from 26.3% to 22%.

Sweden has also donnedthe golden straitjacket of �scal or­thodoxy with its pledge to pro­duce a �scal surplus over the eco­nomic cycle. Its public debt fellfrom 70% of GDP in 1993 to 37% in2010, and its budget moved froman 11% de�cit to a surplus of 0.3%over the same period. This al­lowed a country with a small,open economy to recover quicklyfrom the �nancial storm of2007­08. Sweden has also put itspension system on a sound foun­dation, replacing a de�ned­bene­�t system with a de�ned­contri­bution one and making auto­matic adjustments for longer lifeexpectancy.

Most daringly, it has intro­duced a universal system ofschool vouchers and invited priv­

ate schools to compete with public ones. Private companies also vie witheach other to provide state­funded health services and care for the elder­ly. Anders Aslund, a Swedish economist who lives in America, hopesthat Sweden is pioneering �a new conservative model�; Brian Palmer, anAmerican anthropologist who lives in Sweden, worries that it is turninginto �the United States of Swedeamerica�.

There can be no doubt that Sweden’s quiet revolution has broughtabout a dramatic change in its economic performance. The two decadesfrom 1970 were a period of decline: the country was demoted from beingthe world’s fourth­richest in 1970 to 14th­richest in 1993, when the averageSwede was poorer than the average Briton or Italian. The two decadesfrom 1990 were a period of recovery: GDP growth between 1993 and 2010averaged 2.7% a year and productivity 2.1% a year, compared with 1.9%and 1% respectively for the main 15 EU countries.

For most of the 20th century Sweden prided itself on o�ering whatMarquis Childs called, in his 1936 book of that title, a �Middle Way� be­tween capitalism and socialism. Global companies such as Volvo and Er­icsson generated wealth while enlightened bureaucrats built the Folk­hemmet or �People’s Home�. As the decades rolled by, the middle wayveered left. The government kept growing: public spending as a share ofGDP nearly doubled from 1960 to 1980 and peaked at 67% in 1993. Taxeskept rising. The Social Democrats (who ruled Sweden for 44 uninterrupt­

Northern lights

The Nordic countries are reinventing their model of capitalism,

says Adrian Wooldridge

A C K N O W L E D G M E N T S

CONTENT S

In addition to the people mentioned

in the text, the author would like to

express his thanks for their help

with this special report to: Matti

Alahuhta, Andreas Alsen, Jorn Bang

Andersen, Ulf Berg, Ewa Bjorling,

Pontus Braunerhjelm, Maria Levin

Erixon, Saeid Esmaelzadeh, Magnus

Gulbrandsen, Jonas Gustavsson,

Mauro Gozzo, Jouko Hayrinen,

Magnus Henrekson, Cecilia Her­

mannson, Kari Herlevi, Anders

Ho�mann, Per­Ola Karlsson, Hannu

Kosonen, Stefan Larsson, Erling

Roed Larsen, Bengt­Ake Ljuden,

Jacob Mchangama, Peter Olesen,

Mrikka Paananen, Petri Peltonen,

Magnus Runnbeck, Ola Pettersson,

Parsi Sahlberg, Peter Santesson,

Oystein Sjolie, Karin Svanborg­

Sjovall, Alexander Triebnigg, Erik

Ullenhag, Frederik Vernersson, Hans

Vestberg, Pekka Viljakanen and

Jacob Warburg.

A list of sources is at

Economist.com/specialreports

An audio interview with

the author is at

Economist.com/audiovideo/specialreports

3 WelfareMore for less

5 ImmigrantsThe ins and the outs

6 BusinessGlobal niche players

8 EntrepreneursIf in doubt, innovate

9 CreativityCultural revolution

11 NorwayThe rich cousin

13 LessonsThe secret of their success

SPECIAL REPORT

THE NORDIC COUNTRIES

The Economist February 2nd 2013 1

2 The Economist February 2nd 2013

THE NORDIC COUNTRIES

SPECIAL REPORT

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ed years from 1932 to 1976 and for 21 out of the 24 years from 1982to 2006) kept squeezing business. �The era of neo­capitalism isdrawing to an end,� said Olof Palme, the party’s leader, in 1974. �Itis some kind of socialism that is the key to the future.�

The other Nordic countries have been moving in the samedirection, if more slowly. Denmark has one of the most liberal la­bour markets in Europe. It also allows parents to send children toprivate schools at public expense and make up the di�erence incost with their own money. Finland is harnessing the skills ofventure capitalists and angel investors to promote innovationand entrepreneurship. Oil­rich Norway is a partial exception tothis pattern, but even there the government is preparing for itspost­oil future.

This is not to say that the Nordics are shredding their oldmodel. They continue to pride themselves on the generosity oftheir welfare states. About 30% of their labour force works in thepublic sector, twice the average in the Organisation for EconomicDevelopment and Co­operation, a rich­country think­tank. Theycontinue to believe in combining open economies with publicinvestment in human capital. But the new Nordic model beginswith the individual rather than the state. It begins with �scal re­sponsibility rather than pump­priming: all four Nordic countrieshave AAA ratings and debt loads signi�cantly below the euro­zone average. It begins with choice and competition rather thanpaternalism and planning. The economic­freedom index of theFraser Institute, a Canadian think­tank, shows Sweden and Fin­land catching up with the United States (see chart). The leftwardlurch has been reversed: rather than extending the state into themarket, the Nordics are extending the market into the state.

Why are the Nordic countries doing this? The obvious an­swer is that they have reached the limits of big government. �Thewelfare state we have is excellent in most ways,� says GunnarViby Mogensen, a Danish historian. �We only have this little pro­blem. We can’t a�ord it.� The economic storms that shook all theNordic countries in the early 1990s provided a foretaste of whatwould happen if they failed to get their a�airs in order.

There are two less obvious reasons. The old Nordic modeldepended on the ability of a cadre of big companies to generateenough money to support the state, but these companies are be­ing slimmed by global competition. The old model also de­pended on people’s willingness to accept direction from above,but Nordic populations are becoming more demanding.

Small is powerful

The Nordic countries have a collective population of only26m. Finland is the only one of them that is a member of boththe European Union and the euro area. Sweden is in the EU butoutside the euro and has a freely �oating currency. Denmark, too,is in the EU and outside the euro area but pegs its currency to theeuro. Norway has remained outside the EU.

But there are compelling reasons for paying attention tothese small countries on the edge of Europe. The �rst is that theyhave reached the future �rst. They are grappling with problemsthat other countries too will have to deal with in due course,such as what to do when you reach the limits of big governmentand how to organise society when almost all women work. Andthe Nordics are coming up with highly innovative solutions thatreject the tired orthodoxies of left and right.

The second reason to pay attention is that the new Nordicmodel is proving strikingly successful. The Nordics dominate in­dices of competitiveness as well as of well­being. Their highscores in both types of league table mark a big change since the1980s when welfare took precedence over competitiveness.

The Nordics do particularly well in two areas where com­petitiveness and welfare can reinforce each other most power­

NORWAY

DENMARK

SWEDEN

FINLAND

Greenland(To Denmark, notto scale)

Spitsbergen(To Norway)

GDP, average annual Population GDP per person growth rate 2012, m 2012, $’000 2002-12, %

Denmark 5.6 55.4 0.6

Finland 5.4 45.5 1.6

Norway 5.0 99.3 1.6

Sweden 9.5 54.9 2.2

All figures are estimates

< 1.0 - 8.0

8.0 - 12.5

12.5 - 25.0

25.0 - 100.0

> 100.0

Average population density per km²2011

200 km

Gross government debtAs % of GDP, 2012 estimate

United States

European Union

Finland

Norway

Denmark

Sweden

0 20 40 60 80 100 120

Sources: IMF; national sources; Nordregio & NLS Finland; Fraser Institute; OECD

Economic-freedom ratings10=maximum

5

6

7

8

9

1970 75 80 85 90 95 2000 05 10

United States

Sweden

Finland Norway

Britain

Denmark

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SPECIAL REPORTTHE NORDIC COUNTRIES

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fully: innovation and social inclusion. BCG, as the Boston Con­sulting Group calls itself, gives all of them high scores on its e­in­tensity index, which measures the internet’s impact on businessand society. Booz & Company, another consultancy, points outthat big companies often test­market new products on Nordicconsumers because of their willingness to try new things. TheNordic countries led the world in introducing the mobile net­work in the 1980s and the GSM standard in the 1990s. Today theyare ahead in the transition to both e­government and the cash­less economy. Locals boast that they pay their taxes by SMS. Thiscorrespondent gave up changing sterling into local currenciesbecause everything from taxi rides to cups of co�ee can be paidfor by card.

The Nordics also have a strong record of drawing on the tal­ents of their entire populations, with the possible exception oftheir immigrants. They have the world’s highest rates of socialmobility: in a comparison of social mobility in eight advancedcountries by Jo Blanden, Paul Gregg and Stephen Machin, of theLondon School of Economics, they occupied the �rst four places.America and Britain came last. The Nordics also have exception­ally high rates of female labour­force participation: in Denmarknot far o� as many women go out to work (72%) as men (79%).

Flies in the ointment

This special report will examine the way the Nordic gov­ernments are updating their version of capitalism to deal with amore di�cult world. It will note that in doing so they have un­leashed a huge amount of creativity and become world leadersin reform. Nordic entrepreneurs are feeling their oats in a waynot seen since the early 20th century. Nordic writers and artists�and indeed Nordic chefs and game designers�are enjoying a cre­ative renaissance.

The report will also add caveats. The growing diversity ofNordic societies is generating social tensions, most horri�cally inNorway, where Anders Breivik killed 77 people in a racially moti­vated attack in 2011, but also on a more mundane level every day.Sweden is �nding it particularly hard to integrate its large popu­lation of refugees.

The Nordic model is still a work in progress. The threeforces that have obliged the Nordic countries to revamp it�limit­ed resources, rampant globalisation and growing diversity�aregathering momentum. The Nordics will have to continue to up­grade their model, but they will also have to �ght to retain whatmakes it distinctive. Lant Pritchett and Michael Woolcock, of theWorld Bank, have coined the term �getting to Denmark� to de­

scribe successful modernisa­tion. This report will suggestthat the trick is not just to get toDenmark; it is to stay there.

The �nal caveat is aboutlearning from the Nordic ex­ample, which other countriesare rightly trying to do. Britain,for example, is introducingSwedish­style �free schools�.But transferring such lessonsis fraught with problems. TheNordics’ success depends ontheir long tradition of goodgovernment, which empha­sises not only honesty andtransparency but also consen­sus and compromise. Learn­ing from Denmark may be asdi�cult as staying there. 7

It can be done

Source: IMF *Estimate †Forecast

Sweden’s government spendingAs % of GDP

1

45

50

55

60

65

70

1990 95 2000 05 10

*

13†

IN �THE LION AND THE UNICORN�, written in 1941,George Orwell invoked the spirit of England in a handful of

images��solid breakfasts and gloomy Sundays, smoky townsand windy roads, green �elds and red pillar­boxes�. When thiscorrespondent tried to summon up appropriate images for thespirit of the Nordic region he found himself turning to the wel­fare state: Swedish fathers enjoying a leisurely lunch while theirchildren sleep in prams (Sweden’s paternity leave is among themost generous in the world); Danish mothers cycling, helmet­less, through the early morning mist with their children in side­cars (Copenhagen has more than 350km of cycle lanes, and athird of the population cycles to work); a Finnish physics teacherdiscussing the nature of elegance with a class of 15­year­olds (Fin­land regularly comes near the top of international league tablesfor educational attainment).

The Nordics still have the world’s most generous welfarestates, but a succession of crises put an end to the region’s magi­cal thinking about welfare. Denmark went into freefall in the ear­ly 1980s. Finland imploded in the early 1990s when the collapseof communism killed its most reliable market. Sweden and Nor­way faced serious �nancial crises at about the same time. Theseevents are still fairly fresh in people’s memories.

Policymakers responded to these near­death experiencesby changing their habits, above all by putting their budgets backinto balance. The Swedes, for instance, reduced their nationaldebt from 84% of GDP in 1996 to 49% in 2011. They also tackled en­titlements to take account of ageing populations. In 1998 Swedenpassed the most sweeping pension reform in any rich country,replacing a de�ned­bene�t system with a de�ned­contributionone and bringing pensions more in line with lifetime incomes.

Denmark has been slower than Sweden to clean out itsclosets. Public spending as a proportion of GDP increased from51% to 58% after the 2007­08 �nancial crisis and is now the high­est in the OECD. But the pace of reform is speeding up. In 2006Denmark increased the state pension age from 65 to 67, to bephased in by 2024­27. In 2010 it halved the upper limit on payingout unemployment bene�t from four to two years. In 2011 it has­tened the demise of an early­retirement scheme which gavesome people the option to leave at 60. In 2012 it announced plansto increase the di�erential between wages and bene�ts.

Welfare capitalism

Even more striking than the Nordic world’s commitment tobalancing its books is its enthusiasm for experimenting withnew ideas. The Swedish state now allows private companies tocompete with government bodies for public contracts. The ma­jority of new health clinics and kindergartens are being built byprivate companies, frequently using private money. The statealso allows citizens to shop around for the best services and takethe money with them.

The Swedes have done more than anyone else in the worldto embrace Milton Friedman’s idea of educational vouchers�al­lowing parents to send their children to whatever school theychoose and inviting private companies or voluntary groups toestablish �free� schools. Almost half the country’s schoolchil­

Welfare

More for less

A generous welfare state that does not cost the earth

4 The Economist February 2nd 2013

THE NORDIC COUNTRIES

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2 dren choose not to go to their local schools. More than 10% of stu­dents under 16 and more than 20% of those over 16 attend �free�schools, two­thirds of which are run by private companies.

Denmark has added a useful twist to the voucher idea. Itnot only allows parents to take their public funds to privateschools with them but also to top them up (within limits) withtheir own money. This is creating a �ourishing market, particu­larly in Copenhagen, ranging from academic schools for tradi­tionalists via religious ones for Muslims to experimental ones forageing hippies. �One of the most popular entertainments inDenmark�, says Mr Mogensen, the historian, �is to spot the latestleft­wing politicians to send their children to private school.�

In the workplace Denmark is a pioneer of �exicurity: com­panies can sack employees with almost American ease but thegovernment provides displaced workers with generous bene�tsand helps them get new jobs. Most employers like the system be­cause it frees them from one of continental Europe’s biggest pro­blems: a dual labour market divided between heavily protectedinsiders and casualised outsiders.

Denmark is also a pioneer of what might be called the intel­ligent state. The government abandoned its fat tax which was in­tended to nudge people into leading healthier lives because theresults were disappointing. But it is also using its purchasingpower to encourage innovation: for example, instead of ordering

wheelchairs from the same old provider itnow plans to order �mobility solutions�from competing companies and then en­courage the most successful ones to ex­port their products. �We need to learnhow to make businesses out of things thatwe want to do for political reasons,� saysLars Andersen, head of the EconomicCouncil of the Labour Movement, athink­tank.

It would be an exaggeration to de­scribe these welfare reforms as a triumphfor Friedmanism. The most comprehen­sive study of school reform in Swedendemonstrates that choice has had a posi­tive e�ect. Anders Bohlmark and MikaelLindahl examined data for all Swedishschoolchildren between 1988 and 2009and found that increasing the share of�free� schools in a particular district leadsto better performance on a variety ofmeasures, from school grades to universi­

ty attendance. The biggest gains are recorded in the regular pub­lic schools rather than in the �free� schools. At the same time,though, Sweden’s ranking in the OECD’s annual PISA tables oneducational achievement has declined. The Swedish press is fullof stories about the misdeeds of private schools and hospitals.Private companies have promised to generate pro�ts year in,year out, particularly if they are backed by private­equity com­panies; but after the �rst wave of rationalisation it often becomesmore di�cult to squeeze savings out of schools and hospitals.

The Finns have one of the world’s most successful educa­tional systems (as measured by the PISA tests) without so muchas a nod to Friedman. They have dispensed with the machineryof educational accountability such as detailed national curricu­lums, school inspections, high­stakes examinations and schoolvouchers. All children attend comprehensive school from ageseven to 16; there is no break between primary and secondaryschool. Teachers experiment with lots of di�erent styles of teach­ing but tend to emphasise creativity and group learning. Theymake extensive use of tests, but only to diagnose students ratherthan to classify them.

Yet the Finns have also dispensed with many of the shibbo­leths of the educational left. At age 16 they rigorously divide chil­dren up between academic and vocational streams. And they donot spend a huge amount on education: 6.4% of GDP in 2009,compared with 7.3% in America. Finnish teachers talk enviouslyabout how much their British colleagues are paid.

Finland’s success depends neither on accountability (theright­wing panacea) nor on resources (the left­wing one) but ontwo things that are ignored in the wider educational debate: trustand stability. The government has found it possible to attracthigh­quality people into a relatively low­paid profession provid­ed they are treated with respect. Teachers are free to design theirown curriculums and develop their own tests. And the systemhas remained almost unchanged since the early 1970s.

Controlling public spending is the hardest job in politics.The Nordics have succeeded because of their willingness to fo­cus on results rather than on ideologies. Still, there is a limit towhat pragmatism can achieve. The Nordic countries continue tosu�er from what Mitt Romney, the Republican candidate inAmerica’s recent presidential election, called �trickle­down gov­ernment�. They are run by professional politicians who have noidea that mandating a year’s maternity leave means one thingfor a government department and another for a start­up. 7

Fabulous Finns

Source: OECD PISA *Mean PISA score for all countries

Education performance of 15-year-olds, selected countries Mean score in science

2

450 475 500* 525 550 575

Finland

South Korea

Australia

Germany

United States

Norway

Denmark

Sweden

2000

2009

The Finnshave one ofthe world’smostsuccessfuleducationalsystemswithout somuch as anod toFriedman

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IN 1965 SWEDEN’S Social Democratic Party embarked onthe Million Programme, an ambitious plan to build a mil­

lion new homes in a country of only 7.7m people. These homeshad everything that good democratic citizens could want�allmod cons, easy access to public services and green spaces.

The government exceeded its target by 6,000, but in otherrespects the Million Programme went awry. Swedish workersquickly showed what they thought of the new homes�many ofthem high­rise blocks of �ats on the edge of cities�by skedad­dling at the �rst opportunity. In the 1980s the Million homeswere �lled by guest workers from the Balkans and Greece. Today,as the guest workers skedaddle in turn, they are being �lled byrefugees from the world’s trouble spots.

Rosengard was once one of the programme’s proudestachievements: a high­rise development that was close to the cen­tre of Malmö, one of Sweden’s industrial powerhouses, but sur­rounded by open space. Today over 80% of its population of24,000 are immigrants. The local shops have names such as Bab­ylon and Lebanon. Women in hijabs and headscarves cart theirshopping through the freezing rain. Men sit in cafés drinkingstrong co�ee and keeping dry. A truck sells falafel sandwiches.

The Swedish state does its best to reach out to these immi­grants. The city of Malmö’s crest is everywhere. The local libraryhas a language café and a chess room. A sports complex includesa swimming pool and a boxing ring. People in red jackets marked�Rosengard hosts��most of them immigrants themselves�helpresidents negotiate the complexities of the welfare state.

Yet the relationship between the state and its clients isstrained. �In Sweden having a job is everything,� says Tobias Bill­strom, the minister for immigration and a former MP for Malmö;but in Rosengard only 38% of the residents have one. Angryyouths have taken to rioting, torching bicycle sheds and recy­cling centres as well as cars.

Per Brinkemo is a former journalist whose life was changedwhen he wrote a book about a Somali boy who was brought upin war­torn Mogadishu. He now runs an organisation that spe­cialises in helping Somali refugees from the basement of a Ro­sengard block of �ats. The centre’s walls are decorated with pic­tures of high­ranking visitors and prizes awarded to MrBrinkemo. But he is no fan of government policies, pointing outthat politicians have little sense of how di�cult it is to integrateSomalis into Swedish society. They hail from nomadic societieswhere trust is reserved for the clan, literacy is rare and timekeep­ing is rudimentary. Three­quarters of Somali children drop outof school. �For Somali immigrants [coming to Sweden] is like be­ing transported to Mars,� he says.

The sums that don’t add up

Mass immigration is posing serious problems for the re­gion. For the Nordic countries to be able to a�ord their welfarestates they need to have 80% of their adults in the workforce, butlabour­force participation among non­European immigrants ismuch lower than that. In Sweden only 51% of non­Europeanshave a job, compared with over 84% of native Swedes. The Nor­dic countries need to persuade their citizens that they are gettinga good return on their taxes, but mass immigration is creating aclass of people who are permanently dependent on the state.

Torben Tranaes, of Denmark’s Rockwool Foundation Re­search Unit, calculates that in the mid­1990s immigrants in their40s�the age group that generally contributes most to the publicbudget�paid only marginally more in taxes than they receivedin bene�ts. In Sweden 26% of all prisoners, and 50% of prisonersserving more than �ve years, are foreigners. Some 46% of the job­less are non­Europeans, and 40% of non­Europeans are classi�ed

as poor, compared with only 10% of na­tive Swedes. Immigrants are so closely as­sociated with the Million Programme,and hence with public housing, that theGringo, a Stockholm newspaper for im­migrants, calls them Miljonsvenskar, or�Million Swedes�.

High immigration is threatening theprinciple of redistribution that is at theheart of the welfare state. Income in­equalities in the Nordic countries are gen­erally lower than elsewhere (see chart,next page), but Matz Dahlberg, of Uppsa­la University, reckons that immigration ismaking people less willing to support re­distribution. The decline is particularlymarked among high­income earners. Im­migration is also causing culture clashes.Nordics fervently believe in liberal val­ues, especially sexual equality and free­dom of speech, but many of the immi­grants come from countries where menand women are segregated and criticisingthe prophet Muhammad is a serious of­fence. Peaceful Denmark found itself onthe front­line of the culture wars whenJyllands­Posten, a newspaper, publishedcartoons making fun of Muhammad.

Immigrants

The ins and the outs

Immigration and growing inequality are making the

Nordics less homogeneous

Out in the cold

Egalitarians all

Source: OECD *0=perfect equality, 1=perfect inequality

Gini coefficient of income inequality*Selected countries, late 2000s

0 0.1 0.2 0.3 0.4 0.5

Mexico

Turkey

United States

Britain

Japan

Spain

OECD average

Germany

Finland

Sweden

Norway

Denmark

6 The Economist February 2nd 2013

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Immigration has divided the Nordics. The Swedes regardtheir open­armed approach to asylum­seekers as an expressionof what is best in their culture. The Danes revisited their immi­gration policies in 1999, spurred by the rise of the anti­immigrantDanish People’s Party. They tightened the rules for family reuni�­cation, made it more di�cult for newcomers to claim bene�tsand set up an integration ministry. Today Denmark receivesmore non­European immigrants than ever, but it has radically re­duced the number of refugees while increasing the number ofpeople on student and work visas.

The biggest battle is within the Nordic mind. Is it more pro­gressive to open the door to refugees and risk overextending thewelfare state, or to close the door and leave them to languish indanger zones? Is it more enlightened to impose secular values ondevout Muslims or to dilute liberal values in the name of multi­culturalism? Trying to reconcile these contradictions can lead tostrange results. Alarmed by reports of female genital mutilation,Nyamko Sabuni, a Swedish cabinet minister, suggested compul­sory gynaecological examinations for all young girls in Sweden.

Liberals are increasingly on the defensive. The number ofimmigration­related attacks is rising. In 2010 Taimour Abdulwa­hab al­Abdaly blew himself up in the middle of a crowd ofChristmas shoppers in central Stockholm; remarkably, he man­aged to injure only a couple of people. In Sweden median house­hold incomes of non­European immigrants are now 36% lowerthan for native­born Swedes, whereas in 1991 they were only 21%lower. But Denmark’s much­vili�ed immigration reforms maybe paying o�: the employment gap between native Danes andnon­Western immigrants has declined to 24 percentage points,compared with 42 in the mid­1990s.

Sweden is now allowing in more skilled workers, havingpreviously combined highly restrictive policies for this groupwith the world’s most generous policies for refugees. Trade un­ions used to have a veto over who was admitted and repeatedlyused it. This may calm the immigration debate, but it may equal­ly well increase the pressure to open the doors even wider forskilled immigrants while closing them for refugees.

A 20­minute drive from Rosengard to the western harbourtakes the visitor to the Turning Torso, a high­rise, high­spec blockthat twists like a lithe athlete and commands spectacular viewsover the Oresund bridge linking Malmö to Copenhagen. Directly

opposite its entrance is an establishment calling itself a �faceliftcentre�. Designer houses cluster around its base. Green’s super­market sells local organic food and advertises yoga classes andtango lessons on the beach.

Thirty years ago Malmö was the capital of working­classSweden, a no­nonsense city dominated by solid citizens whoworked in the Kockums shipyard and voted for the Social Demo­cratic Party. Then the global economy turned against it. The ship­yards contracted and the local factories and textile mills closed.The once­dominant working class shrank to near­invisibilityand the population split between professionals living in design­er lofts and refugees living in Rosengard’s high­rises. The giantKockums crane that had become the city’s symbol in 1974 wasdismantled and sent to South Korea in 2002. In 2005 the TurningTorso became the city’s new landmark.

The decline of the working class and the increasing polar­isation of professionals and immigrants is being repeated acrossthe region. The Nordic countries are still among the world’s mostequal, and in one important respect they are becoming more so.In 2010­11 around 60% of university graduates in Finland andSweden were women. Sweden has almost as many female asmale MPs. In Denmark the prime minister and a raft of otherministers are women.

But in other respects money is making the Nordics lessequal. As a proportion of the economy, Sweden’s private­equityindustry is second only to Britain’s in Europe, and Norway isawash with oil money. Some of the new rich are splashing out onPorsches and big houses, but most prefer to spend their money insubtler and less conspicuous ways. Even so, they live in a di�er­ent world from the immigrants stuck in Rosengard. 7

THE NORDIC COUNTRIES

NOVO NORDISK HAS the sheen of a global champion. Itscorporate headquarters near Copenhagen is decorated

with freshly cut �owers and thought­provoking sculptures, withlittle bowls of fruit and nuts dotted here and there. The CEO andhis fellow executives work from a large open­plan o�ce.

That is all as it should be. Novo produces half the world’smedical insulin and frequently generates shareholder returnsapproaching 30%. The world market for insulin is growing fast:about 346m people already su�er from diabetes and the numberwill grow as the emerging world gets richer. Novo is well placedto remain the world’s leading insulin producer for years to come.

The Vikings’ modern descendants believe they can turnglobalisation to their advantage. They excel at producing born­global companies. Ericsson, founded in 1876, started sellingphones in China in the 1890s. They also outperform more mus­cular competitors. Torben Pedersen, of the Copenhagen Busi­ness School, points out that Nordic countries are past masters atadjusting to rules dictated by big countries such as Germany orAmerica. Surely they can cope with China and India?

Alas, the logic that destroyed brawnwork such as ship­building and textile manufacturing is now moving on to brain­work. The best Nordic companies are transforming themselvesfrom export machines into global networks. Ericsson, for exam­

Business

Global niche players

Nordic companies have coped well with globalisation,

but need new blood

ple, has reduced the number of workers it employs in Swedenfrom 31,000 in 2001 to 18,000 today. Medium­sized companiesare taking advantage of low production costs in the Baltic statesas well as in China and India. In turn, foreigners are invading theVikings’ strongholds. Volvo, Sweden’s fabled car company, hasbeen swallowed by a Chinese upstart, Geely. Danisco, a Danishfood­ingredients company, has been taken over by America’sDuPont. Ericsson has sold its handset division to Sony. Nokia is ashadow of its former self.

The Nordic countries have an impressive number of glob­ally competitive companies. Denmark is a world leader in hear­ing aids (Oticon), shipping (Maersk), toys (Lego), drink (Carls­berg) and windpower (with more than 200 companies thataccount for a third of the world’s wind­turbine market). NovoNordisk is at the centre of a biotech cluster, dubbed Medicon Val­ley, that stretches from Copenhagen to Malmö in neighbouringSweden and has an annual turnover of ¤13.4 billion.

Sweden boasts some world­class manufacturing compa­nies, particularly in mining equipment and machine tools (Sand­vik and Atlas Copco), as well as retail stars such as IKEA andH&M. Finland’s Kone is one of the world’s leading lift and escala­tor companies. Nokia’s problems are being o�set by the rise ofelectronic­games makers such as Rovio, the creator of AngryBirds. Norway is a world leader in oil services and �sh farming.

Nordic companies have thrived in well­de�ned globalniches. Lego dominates the market for interlocking bricks. Sand­vik is a machine­tool superpower. Volvo Trucks produces theworld’s best high­quality lorries. Nichi�cation protects high­costcompanies from emerging­market competitors. Nobody wantsthe cheapest machine­tool when a defective one can cause mil­lions of pounds­worth of damage.

They owe their success to four qualities. The �rst is theircommitment to relentless innovation which they apply to eventhe most basic industries. Tiny Denmark remains the world’seighth­biggest food exporter thanks to its obsession with pro­ductivity. Danish farmers use implanted chips to monitor theircows to maximise their milk yield. KJ Industries has developed away of mechanising the carving up of carcasses by program­ming the cutting machines with the help of X­rays.

Nordic companies balance their passion for the new withan ability to take the long view. Sweden is still dominated by a

handful of long­established families suchas the Wallenbergs and the Bonniers.Denmark has a number of organisationssuch as the Carlsberg Foundation and theLego Foundation, set up partly to lookafter the long­term interests of their par­ent companies.

The third quality is their consensus­based approach to management. Theypride themselves on their �at structuresand democratic ways which they feel pro­mote trust and co­operation. BCG thinksthe region has the world’s most skilled�low­skilled� workers. But they balanceco­operation with a fourth quality�a pas­sion for replacing labour with machines.The Copenhagen underground has dis­pensed with drivers and ticket­sellers.Shops get by on automated checkouts.

To see these forces in action, consid­er two companies in di�erent industries.Sandvik started making steel in the late19th century in the small town of Sandvi­ken, two hours north of Stockholm. It is

now a global giant that produces everything from machine toolsto steel rods for nuclear reactors. Sandvik’s small­town rootshave not prevented it from becoming a global leader in its corebusinesses. �Expanding abroad is how we save jobs at home� is acommon refrain.

Sandvik is obsessed by promoting productivity�both itsown and its customers’. A giant factory that produces steel rodslooks as if it is run by ghosts: four people monitor computerscreens in a command centre and a few others patrol the �oor. Aproductivity centre is devoted to pushing forward the frontiers oftechnology�making the world’s fastest drills, for example�andtraining employees to help customers. The company’s mantra is�we sell productivity not products.�

Haldor Topsoe founded the company that bears his nameback in 1940. Now aged 99, and bright as a button with it, he re­mains chairman. His company, meanwhile, has grown into a glo­bal giant. Mr Topsoe ascribes its success to two things. He found aperfect niche in catalysis. Catalysts accelerate lots of chemicalprocesses that are vital to a modern economy. They are also ex­tremely hard to copy. So demand is growing and barriers to entryare high. He believes that his company bene�ts from being a fam­ily a�air, which allows it both to invest for the long term and totake advantage of the global market.

Vulnerable giants

For all their forti�cations, the best Nordic companies arenevertheless under assault from two powerful enemies: rich­world rivals and emerging­world upstarts. In 2000 Nokia domin­ated the mobile­phone business. Scandinavian companies hadpioneered the GSM standard for mobile communications andNokia was the world’s biggest producer of handsets. Today it is�ghting for its life: since Stephen Elop took over as CEO in 2010,the company has cut a �fth of its workforce. The world’s mobile­phone leader was beaten to the discovery of smartphone gold byApple, a Californian company whose core competence was mak­ing computers. Ericsson decided to abandon the handset busi­ness in order to focus on making telecoms equipment, but it isnow engaged in a mighty battle with Huawei, a Chinese com­pany that did not exist in the early 1980s.

These twin assaults have revealed one of the region’s big­gest weaknesses: its failure to bring together design and engi­

Source: Thomson Reuters *Estimate

Nokia’s market capitalisation As % of Finland’s GDP

2005 06 07 08 09 10 11 12*

0

10

20

30

40

50

60

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IN 2010 A GROUP of students at Aalto University, just out­side Helsinki, embarked on the most constructive piece of

student activism in the history of the genre. They had been con­verted to the power of entrepreneurialism during a visit to theMassachusetts Institute of Technology. When they got homethey organised a �summer of start­ups� to spread the word thatFinland’s future lay with new companies, not old giants. Thesummer of start­ups turned into a season of innovation.

The Start­Up Sauna�a business accelerator that is still runby young enthusiasts but now funded by government, businessand academia�occupies a dilapidated warehouse next to theuniversity. It o�ers a wide range of services: working space,coaching for budding entrepreneurs, study trips to Silicon Valleyand plenty of networking opportunities (including in the Sau­na’s many saunas).

The Sauna­masters have an understanding of entrepre­

neurship in advance of their years. They recognise that there ismore to innovation than high tech: the Sauna also has designand knitting factories. They understand the importance of bridg­ing the gap between engineering and design. They realise thatpromoting entrepreneurship is a matter of changing culture asmuch as providing money. They look to Russia and the Balticstates as well as to Boston and San Francisco.

No more Nokias

The student revolution was part of a wider reconsiderationof the proper relationship between government and business.This had started in 2008, when the Finnish government shookup the universities (and created Aalto) in an attempt to spur inno­vation. But it was speeded up by Nokia’s problems. Finland hadbecome dangerously dependent on this one company: in 2000Nokia accounted for 4% of the country’s GDP. The governmentwanted to make the mobile­phone giant’s decline as painless aspossible and ensure that Finland would never again become sodependent on a single company.

The Finns created an innovation and technology agency,Tekes, with an annual budget of ¤600m and a sta� of 360. Theyalso established a venture­capital fund, Finnvera, to �nd early­stage companies and help them get established. The centrepieceof their innovation system is a collection of business accelera­tors, partly funded by the government and partly by private en­terprise, that operate in every signi�cant area of business andprovide potential high­growth companies with advice and sup­port from experienced businesspeople and angel investors.

As a result, Finland has become much more market­ and en­trepreneur­friendly. It has produced an impressive number ofstart­ups, including 300 founded by former Nokia employees.Microtask outsources o�ce work. Zen Robotics specialises inautomating recycling. Valkee makes a device that lifts wintrydark moods by shooting bright light into the ear canal. The coun­try has also acquired the paraphernalia of a tech cluster, such as acelebratory blog (Arctic Startup) and a valley­related name (Arc­tic Valley). The fashionable argument now is that Nokia’s declineis �the best thing that ever happened to this country�.

The new Finland is particularly proud of its booming vid­eo­games industry, including successful companies such as Ro­vio Entertainment, the maker of Angry Birds and a leading sup­porter of the Start­Up Sauna, and Supercell, the maker of Clashof Clans. Supercell’s employees are what you would expect:men with beards and ponytails who take time out from theircomputer screens to show o� their collections of action �gures.

Ilkaa Paananen, Supercell’s CEO, points out that Finlandhas spent years preparing for its current success. Helsinki startedto host a festival for gamers in the early 1990s. Today the festival isso popular that the organisers have to rent the city’s biggest ice­hockey stadium, with room for 13,000, and still turn peopleaway. Kajak University o�ers courses in video games. Finns havea comparative advantage in the four things that make for greatgames�blood­soaked storylines (all those sagas), bold design,ace computer programming and what might be politely called�autistic creativity�.

The arrival of the iPad and its apps allowed the Finnish in­dustry to break out of its frozen ghetto. Mr Paananen says henow has the wherewithal to build the �company of my dreams�.Screens on the wall display how Supercell is doing against its ri­vals in real time. The games­masters talk about IPOs and �mas­sive growth curves�. The company recently moved into newheadquarters which, poignantly, used to be Nokia’s R&D centre.

The mood re�ected in the summer of start­ups can befound across the region: investors everywhere are looking fornew opportunities and bright young things are running compa­

Entrepreneurs

If in doubt, innovate

The Nordic region is becoming a hothouse of

entrepreneurship

neering, two of its core strengths. They have also shown up thedownside of two of the region’s great virtues, consensus and pa­tience. Consensus­based management can prove a disadvantagewhen industries are being disrupted by new technologies, andpatience can lead to the scrapyard. Nokia put up with a lacklustreCEO for four years. The CEO of Vestas, which specialises in windpower, is still in place even though its stocks have fallen by 90%.

These problems are not insoluble. Ericsson has done betterthan Nokia in pulling itself out of its tailspin. It is focusing on adefensible global niche, telecommunications networks, and try­ing to turn itself into a creative hothouse. The company’s innova­tion centre has come up with lots of clever ways to show that�everything that can be connected will be connected.� The com­pany is also shifting its emphasis from making equipment to pro­viding services. Its obsession with creativity can be a little trying:does eating your lunch o� a table­tennis table really make youmore innovative? But Ericsson is a powerful force in the indus­try�40% of all mobile­phone tra�c passes through its net­works�and it argues strongly that the market is set to take o�.

Even so, the region’s best companies are relentlessly mov­ing their activities abroad not just in pursuit of cheaper workers(though that can help) but also in order to be close to the world’smost populous markets. Such o�shoring exposes the region’sbiggest weakness: that most of its best companies were foundedin the late 19th and early 20th centuries, and that its ability to re­plenish its corporate stock has declined as the state has got big­ger. In California 39 of the state’s 100 biggest companies werefounded since 1970. In Denmark the number is just three�andone of those three, Bonus Energy, has been taken over by Ger­many’s Siemens. In Sweden the number is just two. A countrythat prides itself on equality and upward mobility is dominatedby a handful of capitalist dynasties.

If the Nordic countries are to generate the high­quality jobsthat their citizens regard as their birthright, they need to producea new generation of successful capitalists. As Karsten Dybvad,the head of the Confederation of Danish Industry, puts it, �youcan’t keep milking the same cow for ever.� 7

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nies in converted warehouses. Hjalmar Winbladh, one of Swe­den’s leading entrepreneurs, says that the atmosphere haschanged completely since he started out in business in the early1990s. Back then people like him were oddities. Today fashion­able young people worship successful tech entrepreneurs suchas Niklas Zennström, the co­founder of Skype,and Daniel Ek and Martin Lorentzon, the co­founders of Spotify. Mr Winbladh says thathis biggest problem is to attract young talentfrom other start­ups. They all shudder atthe thought of spending their lives in bigorganisations.

Nordic governments recognise thatthey need to encourage more entrepreneurs ifthey are to provide their people with high­quali­ty jobs, and that they can no longer rely on largecompanies to generate business ecosystems on their own.They are creating government agencies to promote start­

ups. They are encouraging universities to commercialise theirideas and generate start­ups. They are telling their schools to singthe praises of entrepreneurship.

Many of the region’s most interesting entrepreneurs oper­ate at the low end of the tech spectrum, often to help parents dealwith the practical problems of combining full­time work andfamily. Niklas Aronsson, co­founder of a company called LinasMatkasse, has applied IKEA’s do­it­yourself model to family din­ners. He delivers bags containing all the ingredients needed for ameal, chopped up and ready to cook�a perfect solution for peo­ple who are short of time but prefer not to bring up their childrenon takeaway pizza.

Monica Lindstedt, founder of Hemfrid, is also in the busi­ness of selling time. She has turned her company into a house­cleaning giant, applying professional management to domesticcleaning and turning it into an employment perk. Hemfrid haspersuaded the government to treat house­cleaning as a tax­de­ductible bene�t, like a company car. It has also convinced com­panies that this is a great way to reward their employees and freethem from domestic distraction. Hemfrid now has 10,000 regu­lar customers and 1,326 employees, 70% of them born abroad.

Nordic entrepreneurs are also reinventing retirementhomes for baby­boomers. A Finnish private housing associa­tion, Asunto Oy Helsingin Loppukiri, has built a housing com­munity in the suburbs of Helsinki that is dedicated to the idea ofhelping people help themselves. The residents took an activepart in designing both the buildings’ common areas (which in­clude saunas and exercise rooms) and their individual �ats. Mostof them own shares in the company. It tries to o�er a balance be­tween independent living and community involvement. Themembers eat together once a week and tend a communal allot­ment whenever they feel like it.

Don’t go

Despite all this entrepreneurial energy, the Nordic regionstill �nds it hard to turn start­ups into enduring companies. Thereare too many examples of successful entrepreneurs who haveupped sticks and gone elsewhere. These include not just mem­bers of the post­war generation such as Ingvar Kamprad, the

founder of giant IKEA (who lives in Switzerland), and Hans Raus­ing, the founder of Tetra Pak, a huge packaging company (whowent to live in England), but also members of the up­and­com­ing generation. Mr Zennström, along with many of the brightestSwedish investors and entrepreneurs in his age group, lives in

London. Too many successful start­ups still chooseto sell themselves to foreign (mainly American)

multinationals rather than becoming localchampions.

Still, there is reason to hope that theentrepreneurial boom will also produce

a new generation of global champions.The region’s lifestyle entrepreneurshave a chance of becoming global mo­guls for the same reason that MrKamprad did: because they are ridingthe wave of demographic change. And

the region’s high­tech entrepreneurshave a chance of founding enduring com­panies because they are building up busi­nesses as well as mastering technology.

One example is Rovio Entertain­ment, which struck gold with AngryBirds, a game that involves catapultingirascible avians at elaborate fortressesconstructed by evil pigs. It was down­

loaded more than 600m times in 2011. Having produced one bighit, most games companies would have started looking for thenext one, but instead Rovio set about turning Angry Birds into abrand and extending its reach. It struck licensing agreementswith a range of companies to make Angry Birds­branded pro­ducts, from toys to chocolate to theme parks. It raised capitalfrom outside investors such as Microsoft, which chipped in$42m. Rovio now has 500 employees in Finland and had a turn­over of $100m in 2011. Michael Hed, the company’s CEO, has atraditional corner o�ce, but it is full of stu�ed birds and pigs. 7

Despite all its entrepreneurial energy, the Nordic regionstill �nds it hard to turn start­ups into enduringcompanies

TWENTY YEARS AGO the Nordic region was a culturalbackwater. Even the biggest cities were dead after 8pm. The

restaurants o�ered meatballs or pale versions of Italian orFrench favourites. The region did come up with a few culturalicons such as Ingmar Bergman and Abba, and managed to pro­duce world­class architects and designers even at the height ofpost­war brutalism. But the few successes served only to empha­sise the general dullness.

The backwater has now turned into an entrepot. Stock­holm relishes its reputation as one of the liveliest cities in Europe(and infuriates its neighbours by billing itself as �the capital ofScandinavia�). Scandinavian crime novels have become a genrein their own right. Danish television shows such as �The Killing�and �Borgen� are syndicated across the world. Swedish musicproducers are �xtures in Hollywood. Copenhagen’s Noma isone of the world’s most highly rated restaurants and has broughtabout a food renaissance across the region.

Creativity

Cultural revolution

One of the world’s blandest regions has become one

of its most creative

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Why has the land of the bland become a cultural power­house? Jonas Bonnier, CEO of the Bonnier Group, Sweden’s larg­est media company, thinks that it is partly because new technol­ogies are levelling the playing �eld. Popular music was oncedominated by British and American artists who were able to useall sorts of informal barriers to protect their position. Today,thanks to the internet, somebody sitting in a Stockholm attic canreach the world. Rovio’s Michael Hed suggests that network ef­fects are much more powerful in small countries: as soon as onewriter cracks the global detective market, dozens of others quick­ly follow.

All true. But there is no point in giving people microphonesif they have nothing to say. The bigger reason why the region’swriters and artists�and indeed chefs and game designers�arecatching the world’s attention is that they are so full of vim. Theyare reinventing old forms such as the detective story or the eve­ning meal but also coming up with entirely new forms such asvideo games for iPads.

The cultural renaissance is thus part of the other changesthat have taken place in the region. A closed society that wasdominated by a single political orthodoxy (social democracy)and by a narrow de�nition of national identity (say, Swedish­ness or Finnishness) is being shaken up by powerful forces suchas globalisation and immigration. All the Nordics are engaged ina huge debate about their identity in a post­social democraticworld. Think­tanks such as Denmark’s Cepos �aunt pictures ofMilton Friedman in the same way that student radicals once�aunted pictures of Che Guevara. Writers expose the dark un­derbelly of the old social democratic regime. Chefs will prepareanything under the sun as long as it is not meatballs.

The region’s identity crisis is creating a multicultural explo­sion. The Nordics are scavenging the world for ideas. They con­tinue to enjoy a love­hate relationship with America. They arediscovering inspiration from their growing ethnic minorities butare also reaching back into their own cultural traditions. Swedishcrime writers revel in the peculiarities of their culture. Danishchefs refuse to use foreign ingredients. A region that has often feltthe need to apologise for its culture�those bloodthirsty Vikings!Those toe­curling Abba lyrics! Those na� �shermen’s jum­pers!�is enjoying a surge of regional pride.

Blood and snow

Over the past decade Scandinavia has become the world’sleading producer of crime novels. The two Swedes who didmore than anyone else to establish Nordic noir�Stieg Larssonand Henning Mankell�have both left the scene of crime. Lars­son died of a heart attack in 2004 before his three books about agirl with a dragon tattoo became a global sensation. Mr Mankellconsigned his hero, Kurt Wallander, to Alzheimer’s after a dozenbestsellers. But their books continue to be bought in their mil­lions: �Dragon Tattoo� has sold more than 50m, and the Wallan­der books collectively even more.

A group of new writers, such as Jo Nesbo in Norway andCamilla Lackberg in Sweden, are determined to keep the �ameburning. And the crime wave is spreading beyond adult �ctionand the written word. Sweden’s Martin Widmark writes detec­tive stories for children. Swedish and British television produc­ers compete to make the best version of Wallander. �The Killing�established a new standard for televised crime drama.

The region has a long tradition of crime writing. Per Wah­loo and Maj Sjowall, a Swedish husband­and­wife team, earneda dedicated following among a�cionados with their police nov­els in the 1960s and 1970s. They also established two of Nordicnoir’s most appealing memes. Martin Beck is an illness­pronedepressive who gets to the truth by dint of relentless plodding.

The ten Martin Beck novels present Sweden as a capitalist hell­hole that can be saved only by embracing Soviet­style commu­nism (the crime at the heart of the novels is the social democraticsystem’s betrayal of its promise).

Today’s crime writers continue to pro�t from these conven­tions. Larsson’s Sweden, for example, is a crypto­fascist state runby a conspiracy of psychopathic businessmen and secret­serviceagents. But today’s Nordic crime writers have two advantagesover their predecessors. The �rst is that their hitherto homoge­nous culture is becoming more variegated and their peaceful soci­ety has su�ered inexplicable bouts of violence (such as the assas­sination in 1986 of Sweden’s prime minister, Olof Palme, and in2003 of its foreign minister, Anna Lindh, and Anders Breivik’smurderous rampage in Norway in 2011). Nordic noir is in part anextended meditation on the tension between the old Scandina­via, with its low crime rate and monochrome culture, and thenew one, with all its threats and possibilities. Mr Mankell is ob­sessed by the disruption of small­town life by global forces suchas immigration and foreign criminal gangs. Each series of �TheKilling� focuses as much on the fears�particularly of immigrantminorities�that the killing exposes as it does on the crime itself.

The second advantage is something that Wahloo and Sjo­wall would have found repulsive: a huge industry complete withsupport systems and the promise of big prizes. Ms Lackberg be­gan her career in an all­female crime­writing class. Mr Mankellwrote unremunerative novels and plays before turning to a life ofcrime. Thanks in part to Larsson, crime �ction is one of the re­gion’s biggest exports: a brand that comes with a guarantee ofquality and a distribution system that stretches from Stockholmto Hollywood.

Dinner in Copenhagen can come as a surprise to even themost jaded foodie. The dishes are more likely to be served onslabs of rock or pieces of wood than on plates. The garnish oftentakes the form of leaves or twigs. Many ingredients, such as seacabbage or wild �owers, are unfamiliar, and the more familiarsort, such as pike, are often teamed with less familiar ones, such

Foraging for fame

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as unripe elderberries. Copenhagen is the restaurant capital of Europe, largely

thanks to Noma, which has been rated among the world’s bestrestaurants for the past three years, and to its founders, ClausMeyer and René Redzepi. Mr Redzepi, the head chef, eschews thestandard fare of Mediterranean cooking such as olive oil andsun­dried tomatoes in favour of local products such as mush­rooms, cloudberries, seaweed and �owers, which he collectsfrom beaches and hedgerows. His signature dishes include vege­tables in �soil� (a mixture of �our, melted butter and beer) and�the Hen and the Egg� (which customers are asked to cook forthemselves, under supervision). Noma’s guests should �experi­ence something that can only happen in this particular part ofthe world and in this particular city�, he says. But they need to bepatient: the waiting list for bookings is three months.

The thousands who are turned away from Noma still haveplenty to choose from. Mr Meyer’s food empire includes a bak­ery chain, a catering business, a vinegar brewery, an organic or­chard, a collection of public allotments and a �Nordic Food Lab�that operates from a boat berthed round the corner from Noma,all dedicated to his mission to rid Denmark of its �uniform, ge­neric, passionless food�. Noma has dozens of imitators­cum­competitors, such as Geranium in Copenhagen, Malling &Schmidt in Aarhus and Ti Trin Ned in Fredericia. Local supermar­kets sell local wild garlic. The beaches and hedgerows are thickwith foodies scavenging for their dinner.

Open­source culture

The Bremen theatre used to be one of the mainstays of thepornography industry: mighty printing presses whirred day andnight in order to slake the world’s thirst for pictures of copulatingDanes. Today it is the home of Volcano, a �multifaceted enter­tainment company� that employs 22 people. Its boss, KristianRiis, is trying to bring imaginative �air to the often routine busi­ness of running a nightclub­cum­concert hall. He mixes concertswith stand­up comedy and quiz nights and particularly prides

himself on his ability to connect di�erent worlds. Hehelps the foreign ministry feature Danish musiciansin Danish embassies abroad. He arranges deals be­tween companies who want to reach the young andbands that want to make money. These deals usually

break down because companies lack nuance (they ex­pect bands to wear their logos or T­shirts) and bands

constantly worry about selling out. Volcano feels it can bringthese two worlds together because �we’re not afraid of talking

about money.� Much the biggest regional power in the music indus­

try is Sweden. Its record producers and songwriters are abig force in the American record industry: about a thirdof the records in the Billboard 100 bestsellers haveSwedish �ngerprints on them. Sweden has also pro­duced groups that have enjoyed international success intheir own right, such as Swedish House Ma�a, Robynand, more recently, The Tallest Man on Earth.

So far Finland has not extended its success in videogames to other areas of the culture industry. Finnish detec­

tive novels are too depressing. Finnish music is too tortured.But do not mistake lack of global reach for lack of creativity: the

country that produced Linux, an open­source computer operat­ing system, is also proud to be able to organise �open­source� cul­tural happenings that allow anyone to have a go.

The biggest annual national opera festival featured anopen­source opera in 2012. Helsinki has an annual restaurantday when everybody is encouraged to serve up what they like.Parks �ll with pop­up restaurants. Streets are converted into out­door eateries. Restaurant day has inspired a succession of other�days� such as spring­cleaning day (when Helsinki becomes agiant �ea market) and teaching day (when games players teachpeople how to design games and cobblers how to cobble).�These kinds of citizen­led events and innovations make Helsin­ki a really good city at the moment,� says Outi Kuittinen of De­mos, a local think­tank. �It used to be a lot duller.� 7

NORWAY IS THE odd man out in the Nordics. While itsneighbours are �irting with free markets, Norway is em­

bracing state capitalism. Its national oil champion, Statoil, is thelargest company in the region. The Norwegian state owns largestakes in Telenor, the country’s biggest telephone operator,Norsk Hydro, its biggest aluminium producer, Yara, its biggestfertiliser­ maker, and DnBNor, its biggest bank. It holds 37% of theOslo stockmarket, but it also controls some non­listed giantssuch as Statkraft, a power­generator, which if listed would be thethird­biggest company on the stockmarket.

The simple explanation for Norway’s penchant for statecapitalism is oil. When it was discovered in the North Sea in late1969 it transformed the country’s economy. Today Norway is theworld’s eighth­largest oil exporter. Petroleum accounts for 30%of the government’s revenues as well as a quarter of the coun­try’s value added.

There is also a more nuanced explanation. Norwegians

Norway

The rich cousin

Oil makes Norway di�erent from the rest of the

region, but only up to a point

have always looked to the state to help manage their abundantnatural resources�minerals, fjords, forests, waterfalls�and tolook after isolated and thinly spread communities. Norway has apopulation density of only 13 people per square kilometre. Nor­way also came up with the idea of the state owning shares inprivate companies: after the second world war the governmentnationalised all German business interests in Norway and end­ed up owning 44% of Norsk Hydro’s shares. The formula of con­trolling business through shares rather than regulation seemedto work well, so the government used it wherever possible. �Weinvented the Chinese way of doing things before the Chinese,�says Torger Reve of the Norwegian Business School.

In recent years the Norwegians have been adjusting theirmodel to get the best combination of state control and globalcompetition. In 2007 they merged two state companies, Statoiland Hydro, in order to create a national champion. They also re­duced the state’s share to 62.5%. For some this shows that Nor­way is liberalising. But the strategy is remarkably similar to thatbeing adopted in China and other state­capitalist countries.

Norway’s state capitalism has resulted in several oddities. Ithas made the country the only western European member of theOPEC club of oil producers. It is also the only advocate of humanrights among them�and a powerful one, thanks to its control of

the Nobel peace prize. Norway has been able to cling onto moreof its old social democratic habits than its neighbours. The oilboom led to a boom in public spending: since the 1970s the num­ber of people employed in education has doubled and that inhealth and social services has quadrupled. The public sectorcontinues to account for 52% of Norway’s GDP.

Oil wealth is bringing its own problems. The oil sector ismonopolising the nation’s technical talent, with more than50,000 engineers currently being employed o�shore. Propertyprices are rising by nearly 7% a year. McDonalds charges $7.69 fora Big Mac, against $4.37 in America.

Oiling the wheels of welfare

Fellow Nordics like to dismiss Norway as the world’s mostnortherly Arab country, but the most striking thing about Nor­way is how quintessentially Nordic it is. Oil may have �lled itsco�ers and recon�gured its political economy, but it has notchanged its culture. Oslo is singularly free from the soaring sky­scrapers and bling­�lled shopping malls that sprout in other oilcapitals. The new opera house is magni�cent, but it tries its bestto look modest. The Munch Museum, celebrating the country’smost famous painter, is housed in a concrete mausoleum.

The Norwegians are well aware of oil’s terrible ability toturn riches into rags and sages into fools. Back in 1990 they estab­lished a sovereign­wealth fund (formally known as the Govern­ment Pension Fund Global) to prepare the country for a post­oilfuture and to prevent deindustrialisation. They also used the oilindustry to promote other local industries such as shipping.

The fund is not without its problems, such as its size (it nowaccounts for 1% of all the world’s stocks), its leisurely approach (itwas slow to exploit the opportunities o�ered by the 2007­08 �­nancial crisis) and its penchant for blacklisting o�ending compa­nies. But it is nevertheless one of the best­run in the world. TheNorwegians have established a clear division between the �­

nance ministry as owner and the central bank as manager. Theyare now trying to improve returns and diversify risks.

The oil wealth has not destroyed Norway’s egalitarian spirit.Finn Jebsen, chairman of the Kongsberg Group, which has largedefence interests, points out that his country has some of theworld’s best­paid manual workers and some of the worst­paidCEOs: blue­collar workers earn three times as much as their Brit­

ish peers, whereas the boss of Statoil earnsjust a couple of million dollars a year.Many of Norway’s richer citizens live inLondon to escape from high taxes and asomewhat claustrophobic society.

Still, Norway is changing fast: newwealth is pulling in newcomers from allover the world and shaking natives out ofsome of their old habits. In Oslo you nowsee nouveaux riches �ashing their wealth,drug addicts and dropouts begging formoney, an army of Swedish barmen andwaitresses and men with prayer beadsdriving taxis. Some 11% of Norway’s resi­dents were born elsewhere.

Like its neighbours, Norway wants tooccupy upmarket niches and sell its exper­tise to the rest of the world. Its governmentcreated Statoil out of nothing by compel­ling private oil companies to hand oversome of their expertise in return for theircontracts and by building on the country’sestablished skills in shipping. It badgeredthe company to innovate by taxing pro�ts

heavily but providing generous tax relief on R&D spending. Norway is now the world’s deep­sea drilling capital. Statoil

is a leading global company in its own right as well as being at thecentre of an elaborate network that includes Norwegian compa­nies such as Aker Solutions and Kongsberg Maritime and thedeep­sea divisions of foreign oil companies such as Schlum­berger. Norwegian companies have learned how to drill horizon­tally as well as vertically. They have also cut the cost of explor­atory drilling by developing technologies for mobile rigs thatallows them to be kept steady in rough weather. The demand forthis expertise is booming.

Norway applies the same strategy to traditional industriessuch as �shing, logging and mining. Its fjords are home to theworld’s most advanced �sh­farming industry. Its pulp and papercompanies are moving into biore�ning. Its tradition of exploitingnatural resources (�we live o� what we �nd in nature� is a com­mon refrain) is giving rise to new occupations such as bioforag­ing. Norwegian aquaculturists are selling their expertise to othercountries that specialise in �sh farming, such as Chile.

Norway has also caught the region’s enthusiasm for entre­preneurship. The government is promoting new businessesthrough bodies such as Innovation Norway and university sci­ence parks. Venture­capital �rms such as Northzone, too, are onthe lookout for clever ideas. The Norwegian Institute for Air Re­search has come up with a device that can measure the levels ofvolcanic ash in the air. Clean Marine has invented a way of clean­ing ships’ exhaust. Norway also has a �ourishing culture indus­try: Karl Ove Knausgard, the author of �My Struggle� (in six vol­umes), is a huge literary talent.

Norway is also a strong exponent of Nordic social values,supporting negotiated solutions abroad and humanitarian poli­cies at home. Of late it has not been a wise guardian of its biggestsource of soft power. Giving Barack Obama the Nobel peace prizebefore he had a chance to do anything, or to the European Union

The country’s principled response to the actions ofAnders Breivik, who committed mass murder in thename of white supremacy, was deeply impressive

12 The Economist February 2nd 2013

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The Economist February 2nd 2013 13

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CECIL RHODES ONCE remarked that �to be born an Eng­lishman is to win �rst prize in the lottery of life.� Today the

same thing could be said of being born Nordic. The Nordic coun­tries have not only largely escaped the economic problems thatare convulsing the Mediterranean world; they have also largelyescaped the social ills that plague America. On any measure ofthe health of a society�from economic indicators like productiv­ity and innovation to social ones like inequality and crime�theNordic countries are gathered near the top (see table).

Why has this remote, thinly populated region, with itsfreezing winters and expanses of wilderness, proved so success­ful? There was a time when most of its population would haveunhesitatingly praised their government, which for most of the20th century meant the social democrats in one of their variousnational guises. The government had provided the people with

cradle­to­grave welfare services, rescuing them from the brutallife of their 19th­century forebears, and stepped in to save thecapitalist economies from their periodic crises.

But free­marketers have poked holes in the pro­govern­ment explanation and o�ered a powerful alternative. In the per­iod from 1870 to 1970 the Nordic countries were among theworld’s fastest­growing countries, thanks to a series of pro­busi­ness reforms such as the establishment of banks and the privati­sation of forests. But in the 1970s and 1980s the undisciplinedgrowth of government caused the reforms to run into the sands.Free­marketers put the region’s impressive recent performancedown to its determination to reduce government spending andset entrepreneurs free.

Government’s role in improving equality is also beingquestioned. Andreas Bergh, of Sweden’s Research Institute of In­dustrial Economics, argues that the compression of Swedish in­comes took place before the arrival of the welfare state, whichwas a consequence rather than a cause of the region’s prosper­ity�and almost killed the goose that laid the golden eggs.

This special report has supported some of the free­market­ers’ arguments. The Nordic countries had got into the habit ofspending more on welfare than they could a�ord and of relyingmore on a handful of giant companies than was wise. They areright to try to trim their states and make life easier for business.But it would be wrong to ignore the role of government entirely.

The Nordic countries pride themselves on the honesty andtransparency of their governments. Nordic governments aresubject to rigorous scrutiny: for example, in Sweden everyonehas access to all o�cial records. Politicians are vili�ed if they geto� their bicycles and into o�cial limousines.

The Nordics have added two other important qualities totransparency: pragmatism and tough­mindedness. On discover­ing that the old social democratic consensus was no longerworking, they let it go with remarkably little fuss and introducednew ideas from across the political spectrum. They also provedutterly determined in pushing through reforms. It is a grave errorto mistake Nordic niceness for softheadedness.

Pragmatism explains why the new consensus has quicklyreplaced the old one. Few Swedish Social Democratic politi­cians, for instance, want to dismantle the conservative reformsput in place in recent years. It also explains why Nordic countriescan often seem to be amalgams of left­ and right­wing policies.

Pragmatism also explains why the Nordics are continuingto upgrade their model. They still have plenty of problems. Theirgovernments remain too big and their private sectors too small.Their taxes are still too high and some of their bene�ts too gener­ous. The Danish system of �exicurity puts too much emphasison security and not enough on �exibility. Norway’s oil boom isthreatening to destroy the work ethic. It is a bad sign that over 6%of the workforce are on sick leave at any one time and around 9%of the working­age population live on disability pensions. Butthe Nordics are continuing to introduce structural reforms, per­haps a bit too slowly but stolidly and relentlessly. And they aredoing all this without sacri�cing what makes the Nordic modelso valuable: the ability to invest in human capital and protectpeople from the disruptions that are part of the capitalist system.

Getting to Denmark

Most of the rich world now faces the same problems thatthe Nordics faced in the early 1990s�out­of­control publicspending and overgenerous entitlement programmes. SouthernEurope needs a dose of Nordic tough­mindedness if it is to get its�nances under control. And America needs a dose of Nordicpragmatism if it is to have any chance of reining in entitlementsand reforming the public sector.

Lessons

The secret of theirsuccessThe Nordic countries are probably the best­governed

in the world

Top of the class

Sources: World Economic Forum; World Bank; INSEAD and World Intellectual Property Organisation; TransparencyInternational; UNDP; Legatum

*Based on equal weightingof indices †2011 ranking

2012 index rankings Global Ease of Corruption Human Overall compet- doing Global percep- develop- rank* Country itiveness business innovation tions ment† Prosperity

1 Sweden 4 13 2 4 10 3

2 Denmark 12 5 7 1 16 2

3 Finland 3 11 4 1 22 7

4 Norway 15 6 14 7 1 1

5 Switzerland 1 28 1 6 11 9

6 New Zealand 23 3 13 1 5 5

7 Singapore 2 1 3 5 26 19

8 United States 7 4 10 19 4 12

9 Netherlands 5 31 6 9 3 8

10 Canada 14 17 12 9 6 6

11 Hong Kong 9 2 8 14 13 18

12 Australia 20 10 23 7 2 4

13 Britain 8 7 5 17 28 13

14 Germany 6 20 15 13 9 14

15 Ireland 27 15 9 25 7 10

in the midst of a euro crisis, might have been �ne individually,but doing both in rapid succession was bad management.

Still, the country’s principled response to the atrocities per­petrated by Anders Breivik was deeply impressive. Mr Breivikblew up eight government buildings in Oslo, killing eight people,and then shot dead 69 more, most of them teenagers, on thenearby island of Utoya. He committed mass murder in the nameof white supremacy. Yet the country’s reaction was a model of re­straint. The court gave him an impeccably fair trial and sen­tenced him to 21years in prison. He now spends his time writingletters complaining about life in his �mini Abu Ghraib� andworking on a book to explain his actions. 7

ues in over 100 countries since1981, says that the Nordics arethe world’s biggest believers inindividual autonomy. The Nor­dic combination of big govern­ment and individualism mayseem odd to some, but accord­ing to Lars Tragardh, of ErstaSkondal University College,Stockholm, the Nordics have notrouble reconciling the two:they regard the state’s main jobas promoting individual auton­omy and social mobility. Anypiece of Nordic social legisla­tion�particularly the familylaws of recent years�can be jus­ti�ed in terms of individual au­tonomy. Universal free educa­tion allows students of allbackgrounds to achieve theirpotential. Separate taxation ofspouses puts wives on an equalfooting with their husbands.Universal day care for childrenmakes it possible for both par­ents to work full­time. Mr Tra­gardh has a useful phrase to de­scribe this mentality: �statistindividualism�.

Nordic people take this at­titude to government with them when they go abroad. In the19th and early 20th centuries some 1.3m people, a quarter of theSwedish population at the time, emigrated, mostly to the UnitedStates. America created an entire genre of jokes about �dumbSwedes� and their willingness to obey rules. These dumbSwedes created the best­governed enclaves in America, such as

Minnesota. Even today Americans withNordic roots are 10% more likely than theaverage American to believe that �mostpeople can be trusted�.

Size isn’t everything

Economists frequently express puz­zlement about the Nordic countries’ re­cent economic success, given that theirgovernments are so big. According to aprofessional rule of thumb, an increase intax revenues as a share of GDP of ten per­centage points is usually associated witha drop in annual growth of half to onepercentage point. But such numbers needto be adjusted to allow for the bene�ts ofhonesty and e�ciency. The Italian gov­ernment, for instance, imposes a heavyburden on society because the politicianswho run it are mainly concerned with ex­tracting rent rather than providing publicservices. Goran Persson, a former Swed­ish prime minister, once compared Swe­den’s economy with a bumblebee��withits overly heavy body and little wings,supposedly it should not be able to �y�but it does.� Today it is �ghting �t and �y­ing better than it has done for decades. 7

The Nordics are hardly blushing violets when it comes toadvertising the virtues of their model. Nordic think­tanks pro­duce detailed studies in English about how they reformed theirstates. Nordic politicians �ght their corner in international meet­ings and Nordic consultants sell their public­sector expertisearound the world. Dag Detter played a leading role in restructur­ing the Swedish state’s commercial portfolio in the 1990s, repre­senting more than a quarter of the business sector. He has sinceadvised governments in Asia and across Europe.

Yet it is hard to see the Nordic model of government spread­ing quickly, mainly because the Nordic talent for government issui generis. Nordic government arose from a combination of dif­�cult geography and benign history. All the Nordic countrieshave small populations, which means that members of the rul­ing elites have to get on with each other. Their monarchs lived inrelatively modest places and their barons had to strike bargainswith independent­minded peasants and seafarers.

They embraced liberalism early. Sweden guaranteed free­dom of the press in 1766, and from the 1840s onwards it abolishedpreference for aristocrats in handing out top government jobsand created a meritocratic and corruption­free civil service. Theyalso embraced Protestantism�a religion that reduces the churchto a helpmate and emphasises the direct relationship betweenthe individual and his God. One of the Lutheran church’s mainpriorities was teaching peasants to read.

The combination of geography and history has providedNordic governments with two powerful resources: trust instrangers and belief in individual rights. A Eurobarometer sur­vey of broad social trust (as opposed to trust in immediate fam­ily) showed the Nordics in leading positions (see chart below).Economists say that high levels of trust result in lower transac­tion costs�there is no need to resort to American­style lawsuitsor Italian­style quid­pro­quo deals in order to get things done.But its virtues go beyond that. Trust means that high­quality peo­ple join the civil service. Citizens pay their taxes and play by therules. Government decisions are widely accepted.

The World Values Survey, which has been monitoring val­

Source: European Commission *Including the press, political parties, national government, the EU and UN

Public trust in institutions*November 2012, % responding “tend to trust”

0 10 20 30 40 50 60

Finland

Denmark

Sweden

EU-27

Russia

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O�shore �nance February 16th Emerging Africa March 2nd America’s prospects March 16th China and the internet April 6th